All right, I'm getting a go signal here, so why don't we get started? Good morning, everyone. Thank you for joining our fireside chat today featuring Seven Hills Realty Trust. My name is Chris Muller. I'm an analyst at Citizens Capital Markets, where I focus on commercial mortgage REITs. We are pleased to cover Seven Hills as well as 22 other names that comprise the 24 public company commercial mortgage REIT universe. That group of companies collectively manages total assets of over $121 billion and has an aggregate common equity market cap of about $21 billion. Seven Hills trades under ticker SEVN and has a market cap of about $177 million. Today, I'm joined by Tom Lorenzini down on my far right, President, CIO of Seven Hills Realty Trust, and Matt Brown, CFO and Treasurer.
It's a pleasure to be with the two of you today, and thank you for joining me. Why don't we start from a high-level overview of Seven Hills and the RMR platform? You guys are externally managed by a subsidiary of the RMR Group, an asset manager focused on commercial real estate with over $40 billion of assets under management. This gives you guys a really broad view into commercial real estate overall. Tom, maybe we'll start with you. Can you talk a little bit about the breadth of the RMR platform and how Seven Hills fits into that picture?
Sure. Thanks, Chris, and thanks for those of you listening at home. Before I start, I will mention that we posted an investor deck on Monday onto the website, so there was some additional information that we put out this week. As far as how Seven Hills relates to the broader RMR platform, RMR is based in Boston, solely focused on real estate, about $40 billion AUM, and the firm itself touches really all facets of commercial real estate from multifamily, industrial, hospitality, retail, life science, hotels, traditional office, medical office, et cetera. There is a tremendous depth of knowledge within the organization. Seven Hills, the publicly traded mortgage REIT, is externally managed, as Chris mentioned, by Tremont Realty Capital. Tremont Realty Capital is a wholly owned subsidiary of the RMR Group, and Tremont is the registered investment advisor for Seven Hills, the commercial mortgage REIT.
The strength really behind the platform helps us immensely as a commercial mortgage REIT because RMR itself has some 30 offices across the country, some 2,000 properties across the country, really allows us to draw upon those resources when we're making decisions. The strength of that platform really is unparalleled for a firm of our size that would really be typically reserved for a Blackstone or a KKR or something like that, but we're able to draw upon these internal resources to really help us make very well-informed decisions, which personally I think is part of our secret sauce, if you will, for the commercial mortgage REIT.
Are there any specific examples that you could give us where having the RMR backing has helped with Seven Hills, maybe either on the loan sourcing side or asset management? Just any specifics would be very helpful.
Yeah, sure. Because RMR manages several verticals, several publicly traded REITs, they are always in the market looking at acquisitions and things of that nature. There is deal flow that comes into that side of the shop. We might see referrals internally that maybe there was an acquisition that they did not want to do, but whoever was bringing them that acquisition said, "Hey, we know you have a credit platform or a debt platform. Can we speak to them? Maybe there is an opportunity for that group to finance a different buyer." That certainly happens on a fairly regular basis. More importantly, I think really is the situation where we need to protect shareholder value in the event that we need to take back an asset.
We've had one asset in our careers that we've had to foreclose upon, and the RMR platform allows us to seamlessly take that asset internally, manage that asset, and really protect shareholder value. That is a tremendous value not only to the shareholders but to us as the commercial mortgage REIT that we're able to maintain that asset and kind of work it out of whatever state it might have been in. That would be really probably one of the strongest strengths that the firm is bringing to us.
Yeah, very helpful. I guess drilling down a little bit, you guys are one of 24 publicly traded commercial mortgage REITs, like I mentioned. The basic business model is originating and managing a portfolio of floating rate loans, bridge loans specifically. Can you talk about what sets you guys apart from the group a little bit? Is it loan sizing? Is it the geographies you operate in? Kind of how do you fit within that 24 company universe?
Sure. Geography, we're well diversified as many of our competitors are as well, but we are solely focused on the middle markets. And middle market, we think about the middle markets as asset values between $25 million and $100 million. So when we're looking at a financing situation, we're generally lending in the $20 million-$75 million bandwidth, if you will. A lot of our larger competitors kind of start where we stop, and we feel that the middle markets is a little bit, there's a little more pricing power in that middle markets because it's a little bit more granular.
Our average loan size is about $30 million, and I think that by being in the middle markets, you still have a very sophisticated borrowing base, you still have quality transactions, you're still in major markets, you're just a little bit on the smaller loan size, again, relative to kind of starting out at the $75-$100 million mark, which provides us, because we're such a deep organization, we can be nimble in those markets whereas a lot of other lenders can't necessarily be efficient there, but we can be because most of the assets that we own on the RMR side fall within that middle market. That's really an expertise, I guess, across the entire platform. The other item that sets us apart from some of our peers is we're vertically integrated 100%.
What I mean by that is we have an originations team that is sourcing transactions that are speaking with developers and borrowers on a regular basis. We're working with the brokerage community to bring in transactions. Underwriting is done internally. All credit functions are done internally. Most importantly, the asset management and ongoing loan surveillance is all done internally. We're not relying on third parties to handle critical functions, especially from an asset management standpoint, which keeps us very close to the transaction, real-time information with our sponsors. We're dealing with them on a regular basis, and that really is a luxury that we have that many of our competitors don't have. The other thing I would just mention relative to our competitors, we are a super clean business plan. We are secured, senior secured, senior mortgages, and that's all that we do.
We're not investors in securities. We're not investors in real estate to own. We are purely senior secured mortgages. We stick to our knitting, and I think it's a very easy business plan for the investing community to understand.
Great. You guys have talked about on a couple of your earnings calls the strength of sponsors. Can you talk about a little bit what that means? Just to put in perspective for everyone in the room, within our commercial mortgage REIT universe, people are lending on loan sizes up $5 million up to $150 million. They are squarely in the middle market here. Can you talk about what is a typical sponsor in that middle market space?
Sure. A sponsor for us, we are very sponsor-centric. We are very focused on their ability to execute on their business plans. It is generally a firm. It could be a large regional firm, could be a national firm, could be an institutional borrower as well. They have done this transaction or similar transactions before. This is not their first. We are certainly not banking somebody on their first transaction. They have had an executable business plan. They have a track record. We are also looking for sponsors that have skin in the game. They have the ability to write a check. These are bridge loans. These are generally some sort of transitional type financing that is happening here. With that, we want to make sure that our sponsors are liquid enough that should they choose to write a check to solve a problem, they can do that.
Really a critical decision when we're looking at whether we're going to bank a new sponsor or not. Generally, they may have an institutional equity partner with them as the LP in these transactions. We've made the conscious decision to really kind of stay away from the syndicated equity model or the retail syndicated equity model and really have focused on sponsors, again, deep pockets generally and long track record and strong experience within the space.
Got it. Maybe changing gears a little bit and turning to the interest rate environment. The biggest headwinds to commercial mortgage rates the last couple of years has been the elevated interest rate environment and then the interest rate volatility. Higher interest rates have been a double-edged sword as well, with existing portfolios pressured from higher interest rates as well as overall transaction activity also being slowed by the interest rate environment. Maybe Matt, I'll throw this one to you. Can you talk about what you guys are seeing in terms of rates impacting commercial real estate lending markets from a high level? Tom, feel free to add anything as well.
Sure. I would say that rates remain competitive. What we're mostly seeing on origination activity is a competitive landscape, and our net interest rate spreads are tightening a bit on recent originations. They're averaging about 1.5% on originations that we've done or are doing this year. It remains competitive.
Yeah, and I think from a rate perspective as well, just whole loan rates, if you will, they remain elevated, but that's okay because borrowers still need to transact. We are still seeing tremendous flow come through the shop, and the borrower is looking for opportunities to recapitalize their projects.
I guess we saw some pretty heavy rate volatility in early April following Liberation Day. Can you guys talk about what impact, if any, that had on your pipeline and kind of where we sit today after things have kind of been digested by the market a little bit?
Sure. I think in January, there was tremendous deal flow. As we kind of came in late into the second quarter and we started hitting Liberation Day, things did seize up for about six weeks. We saw the backup in the CMBS market. We saw backup in all the securitized markets. We saw some of our competitors actually kind of sit on the sidelines and pull back on some term sheets. We saw transaction volume kind of seize up as well just because borrowers, I think, were hesitant to commit to move forward without knowing what the future might look like. That lasted about six weeks, and then people began to understand that they can work within this framework. During that seize up, if you will, we saw spreads widen quite a bit, but then they came back in rather dramatically.
I would tell you that we're close to, if not at the same levels that we were pre-Liberation Day, if you will.
Would you say the absolute level of rates or interest rate volatility are more important to getting transaction activities to start to normalize?
Just stability, right? It's the volatility. It's the unknown that I think that gives a lot of borrowers pause because oftentimes they might be making a decision between, "Should I do a short-term fixed rate loan or should I do a floating rate loan? What do I think rates are going to do in the future?" If they're all moving around and we see that volatility, a lot of folks, if they do not need to transact, they're just not going to do anything. If rates can remain elevated, but if they're stable and we know what the rules of the game are, then everybody can deal with that appropriately and make a decision that they can have some confidence in.
Can you talk about, I guess, the typical lifespan of an origination or timeline of an origination and how that volatility kind of plays into that? What I'm trying to get at, have you seen deals drop out of the pipeline because of the volatility in the process of the closing?
Absolutely. Generally, from start to close, from the time a transaction comes in until the time that we actually fund, typically probably about 60 days. It can certainly take longer in certain circumstances, but generally 45-60 days. We may find ourselves in a situation where if interest rates were moving, let's go back two years or three years when rates were increasing dramatically on a fairly regular basis, it was nearly impossible to make a decision to close a transaction from a borrower's perspective because they were underwriting one level of cost of capital, and then 30 days later, it was completely different. Obviously, if rates are coming down, that's a benefit, and borrowers are not going to be as skittish of that.
Anytime that there's volatility and you don't have the ability to have confidence in what your ultimate capital stack is going to look like, it's a reason to delay a transaction or it's a reason to back out of an acquisition, which then just puts the whole transaction altogether. We have seen a fair amount of that through the pipeline where borrowers are looking at a property to acquire, they get into diligence, they're looking at the capital stack, they don't like what they see compared to what they saw 30 days ago, and they simply move away from the transaction and that deal dies.
Got it. Matt, does RMR have a house view of rates or just anything that you want to share with what your expectation of the path of rates is over the next year or two?
Sure. Obviously, we pay attention to the curve quite regularly. Right now, I think we're expecting a couple of rate cuts for the balance of 2025, but something we monitor closely and think about how that impacts our origination activity.
Got it. One thing that's not talked about much these days, but could become a net benefit to commercial mortgage rates, are interest rate floors. Everyone's talked about caps for the last couple of years as rates went up, but loan floors are also typically part of new originations. If rates do come down the way futures are suggesting, which I think last I looked was about 100 basis points by the end of 2026, those floors on newer vintage loans could start playing into earnings. Matt, can you talk about the existing floors in the portfolio and if you do expect them to be a meaningful contributor to earnings going forward?
Sure. Right now, all but one of our loans has an interest rate floor. Those floors range from 10 basis points all the way to 520 basis points. We have one loan that's currently active. The floor is helping us. I would say our average floor, I think, is 2.16%. If we see a rate cut, we do expect a couple more floors to kick in, but it definitely provides us some protection as rates decline. It's also important to note on our secured financing facilities, we do not have any interest rate floors in place, so that's going to benefit us. We do have a couple of office loans in our portfolio, and as we've done extensions on those loans, we've increased the floors once again, giving us more protection as well as motivation to the borrowers to refinance us out over time.
Very helpful. I guess turning to the loan portfolio, you guys have done a great job, and as Tom mentioned, they've only had to take back one REO property to date. Can you talk about what drove that success on the credit side?
Yeah. Look, a lot of that really falls on the fact that we have this depth of bench at the RMR platform, right? That we have these resources to pull upon when we're looking at whatever property type it is. If I have an industrial asset that we're considering in Columbus, Ohio, then I have an industrial team that I can call upon and say, "We have assets in that market. What are we seeing? What do we think about this location? What do we think about leasing activity?" That helps us make really informed decisions. If you multiply that across the platform, I can do that with office, I can do that with hotels, I can do that with retail, I can do that with multifamily, it really allows us to make, in our opinion, very good decisions.
If we like a transaction, we can really lean in. It also helps us that if we see a flaw in the transaction that maybe was not apparent, that helps us back away from it. The other piece of that equation, I think, is sponsorship. Again, we have been very focused on sponsorship, and we are looking to bank individuals and firms that have the wherewithal to weather a storm and contribute additional equity if needed, what have you. That makes a difference for portfolio performance.
I guess drilling down a little bit on the REO asset, and it's relatively small relative to your portfolio size. I think it's $9 million and change. It's an office property in Yardley, Pennsylvania, but you guys are in a good position where that property is profitable. I think you said it contributed about $0.03 to last quarter's earnings. You have the ability to be patient on it. It's not something that's dragging on your current earnings. Are there any updates you can give us on the path of that asset? Is that something we could see sold in 2025, or is it the plan to just be patient since it's not really dragging on earnings?
I think the plan right now is to be patient. There's no impetus to sell the asset. The asset is an 87,000 sq ft Class A LEED- certified property, 82% leased. There's a tenant that is renewing right now. Beyond that, there's no rollover in that asset until late 2028. Even at that point, I think it's only about 4% of the building. Rent roll there is incredibly stable. To your point, it's added to our distributable earnings. We'll collectively make that decision when to sell, but there's no immediate timeline to do so.
Got it. I guess aside from that Yardley office, we've seen office has been the poster child for stress in the commercial real estate sector. Aside from the one property you had to take back, you guys still have 25% of your portfolio in office assets. How come your office exposure has performed so much better than the rest of the sector?
I like to think we're smarter, but I think really part of the reason I think, again, it's sponsorship. I think our loans have been structured appropriately. All of our loans, not just office loans, but all of our loans will generally have some sort of rebalancing guarantee if there's any sort of debt service shortfall where the sponsors will have to contribute additional equity to them. There might be some of the extensions that we've done in the office space, sponsors have come in with cash to deleverage the position, which indicates to us that they're there to protect their equity, which is a terrific spot for us to be in, right? That we've got a borrower that is looking at this saying, "Hey, look, I'm going to protect the asset.
I'm going to do what's right, and I'm going to put in some additional cash. I would also say that just from an underwriting perspective, the six office loans that we have, three of them are in the mid-90s on occupancy, and the other three are in the low to mid-80s on occupancy. They are all occupied. They are all cash flowing. Obviously, they are all well located, and they are generally pretty well leased. Part of that is a little bit of luck, but I'd like to think that a lot of it really has to do with the fact that we've just underwritten and structured these loans appropriately.
Matt, how are you guys thinking about origination volumes for the balance of the year? What does your repayment schedule look like over that same period? Should we expect to see some net portfolio growth for the balance of 2025?
Thus far in 2025, we've closed on about $50 million in loans. That was in the first quarter. We have a couple of loans progressing through diligence for about another $50-ish million. We had one repay during the quarter for $42.5 million, a retail property. We are expecting about $125-$150 million of additional repayments during 2025. It is really on us to actively manage that and get ready to redeploy that capital as soon as we can. We have a robust pipeline of about $1 billion of deals that we are constantly looking at. It is really a timing game of getting ready as that repay happens, getting the origination right behind that.
Got it. We're also hearing that banks largely remain on the sidelines, which does create a nice opportunity for guys like you to kind of help fill that void and to get some loans that you may not have gotten before that would have gone to the banks. Is this a dynamic that you guys are seeing continue? How long do you expect that to remain? Is that the foreseeable future, or do we normalize in six, eight quarters and then the banks step back in?
I think the banks are going to be forever have a little bit lower real estate exposure than what they've had historically. I think that model has changed a little bit. The banks today, the regional banks and certainly large money center banks would rather provide a lender such as Seven Hills or a debt fund or another mortgage REIT. They would rather provide them with a facility to finance their assets, right? They get better treatment that way. Their look-through LTVs remain much lower at 50%, 55%, 60%. That's a much better place for them to play than to go out and originate a new loan and increase their production and their overall real estate exposure. I don't anticipate it's going to ramp up dramatically at all. I think it's going to stay muted for the foreseeable future.
I think that it's a great opportunity for lenders such as us, alternative lending in the alternative lending space, really to increase market share.
Got it. I guess turning to the financing side, the financing environment's also seen a couple of false starts. Earlier this year, we saw a couple of new CRE CLOs get done, but that interest rate volatility in early April kind of put things on pause, although things have started to fall back a little bit. Matt, can you talk about the financing side of the business and what looks attractive today? Could a CLO work at some point in the Seven structure at some point in the future, maybe billion-plus loan portfolio size? Just how are you guys thinking about the financing side of the business?
Sure. As it relates to CLOs, potentially in the future, it could be in the cards. I would say right now, given our portfolio size and portfolio composition, it's not something that we're currently focused upon. Look, we have great relationships with our lenders. They remain open for business and quite competitive in this environment. That's a real positive supporting our deals that we're looking at. The other thing as it relates to Seven Hills, we have a hands-on approach with our borrowers, both from origination, underwriting, and asset management and servicing. I think that's something that our borrowers really like.
Got it. I guess shifting to some liquidity management questions. Most of the commercial mortgage REITs have been holding excess liquidity to have more flexibility on loan workouts for the most part, but you guys have not needed that liquidity to take back much REO aside from that Yardley office that we talked about earlier. Can you talk about how you think about liquidity in this environment and what's like a normalized cash balance that you guys would like to operate once we get past or through this cycle?
Sure. Our current cash position as of March 31 was about $42 million. We view that as more than adequate for Seven Hills Realty Trust to run its business and look to deploy some of that cash with upcoming originations that we're expecting. We have about $28 million of unfunded commitments in our loan portfolio. As borrowers request those funds, we can put leverage against that. Where we are today, we definitely have adequate liquidity to run the business.
Got it. You guys have had pretty solid dividend coverage over the last couple of years, and you're one of only a handful of commercial mortgage REITs that has not had to cut their dividend through this cycle. So can you share any thoughts on the path of earnings going forward and dividend coverage for the remainder of the year? Do you expect that to persist, or is it kind of dependent on the pace of originations and portfolio size?
Yeah, our dividend historically has been very well covered. We currently pay $0.35 per quarter. I will say our Q1 earnings were $0.34 of DE. We guided to $0.29-$0.31 for the second quarter of 2025. It's always important to note that our portfolio is rock solid. We have an average risk rating below three, and all of our loans are performing. I will say our board does look at our dividend each quarter, and what we're expecting in 2025 is that the repayments that I touched on earlier have higher net interest rate spreads than the loan originations that we're doing. I will say it's a very fluid situation at Seven that we're monitoring closely, and getting the money put to work in deals that we feel good about is really important for us.
Got it. So we just have a few minutes here. Why don't we see if we have any questions in the audience? Otherwise, I can throw a couple more out. Yep.
I want to ask you about, it seems like certain assets, there's an earnings recession because they've been going to hotels or other asset offers because they've been not paying their interest and so forth. Are you seeing some opportunities where you might not lend at 10, but your pay is at five or six? And you have all this hybrid debt structure like the CLOs, you fix warrants and other things to get you maybe 200, 300, even more back end. It seems to me this is more like a transitional loan, which I think this market needs. At least I think so. What's your opinion on that?
There is certainly a need for that. There's a lot of overleveraged assets, right, that were loans were written in 2021, 2022, and they're coming due, and they don't qualify for a new financing without a significant amount of cash coming in to lower that capital stack. It's not something that we're pursuing as a business plan, but there and I think there's opportunity funds out there that will do that, right, that they'll do a pay-and-accrue type structure, or they'll take a piece of the equity or something along those lines and do a participating mortgage or something. It's not necessarily what our business plan has been to date.
In that situation, and we finance properties like this where that refinance is coming due, they're overleveraged, but we're looking for the sponsorship to kind of come in and right the ship, and then we'll write a new senior loan rather than do a cash neutral and then take additional risk for additional yield. That just hasn't been our business plan. It doesn't mean it's the wrong business plan. It's just not what we're focused on.
Is there any private mortgage funds from others that are hybrid?
I'm sure that there are. I'm sure that there's private debt funds out there that are doing that.
Any other questions from the audience?
We talked a lot about the sponsor profile. How many of your sponsors are borrowers and debt within the warrants that you have there? Kind of how far do you see as a problematic debt setup? Just want to hear more about that.
I think I missed part of that question. Were you asking how many of them are repeat? Did I hear that?
Yes.
Yeah. About a third of our volume is repeat sponsorship. That's one of the things that we're looking at when we write the first loan, right? We want to make sure that we're lending to organizations or individuals that have a business. This is their business. This is their business plan. Let's do the first loan with them, and then hopefully we'll do the second and the third with them as well because those are certainly easier to do kind of as everybody's been indoctrinated into the process. We're actively looking for repeat sponsorship.
Just a follow-up to that, I guess you guys cover quite a bit of sectors. One of those kind of carve-out opportunity sectors and supply and demand that will come behind your type of product. What sector do you see as the next type of two to three years that will be more than two portfolio as you guys have out there now for both LLCs?
Multifamily remains probably the number one product type that we like to lend into in the market as well. I mean, that's a market that has long-term fundamentals just make sense. There's just a housing shortage in this country. Two, you've got the government agencies and they're financing everybody on the back end. There's a tremendous amount of liquidity there. It's also really one of the largest traded property types out there. There's a massive investor demand. That's a terrific space to lend into. I would tell you industrial still makes sense. There's been some softening there, but pick your spots. We like the select service hotel space, not necessarily the full service, but we like the select service. Neighborhood retail, grocery-anchored retail, right? Needs-based retail that's a little bit more Amazon-proof. That's a terrific place to lend capital today as well.
If you have one other question. I understand you deal with transitional assets or others. If a group comes in, their LTV, they did a loan in 2020, it was 65%-70% LTV, and now it's 84% LTV. They need to restack and pay down the senior or something. That's not what you do.
We will write a new senior in that situation, but they are going to come in with some cash ideally to deliver their existing loan when we go to refinance. If their mortgage that is coming due is $40 million, but we think they only qualify for $35 million, we are going to ask them to write a check for $5 million. We might not do that transaction. The risk profile does not fit what we are looking for.
I think that's all the time we have. I'd like to thank Tom and Matt for sitting up here today.
Thank you, Chris. Thank you all.
Thank you.